Upcoming credit scoring changes
Just in from Fair Isaac~
FICO® 08 Score® 08 Score: More Power, Less Pain
Since the introduction of its FICO® score in 1989, Fair Isaac has routinely redeveloped the scoring formula. FICO® 08 is the company’s latest update. Redeveloping the formula in this way keeps the scores attuned to consumers’ credit habits. It also allows Fair Isaac to make changes to the model to meet lenders’ needs, and it enables the introduction of technical innovations that significantly enhance the score’s predictive power. The redeveloped FICO® 08 score offers more refined risk prediction compared with prior versions. As a result, the formula provides significantly improved risk evaluation across the entire population of consumers, more than twice the improvement offered by prior updates.
The most significant improvements are seen in consumer populations that may be of particular interest to lenders. This includes a 5-15 percent improvement in predictive power for credit shoppers and those with prior blemished credit histories, as well as adjustments to better address consumers who have limited credit experience.
As with previous versions of the FICO® score, FICO® 08 will include authorized user credit accounts in the calculation of the score. In this way FICO® 08 continues to support lenders’ efforts to comply with Federal regulations. Significantly, FICO® 08 also incorporates new technology that materially reduces the potential impact to the score from tampering through the abuse of authorized user accounts.
New Design Features
Discussions with federal regulatory agencies and extensive feedback from lenders on the initial, limited release of FICO® 08 identified two critical market needs that FICO® 08 is being designed to meet.
Protection from Authorized User Abuse — The industry seeks protection for lenders’ ability to properly assess repayment risk, by mitigating the abusive practice of authorized user account “piggybacking.” This illicit credit repair practice attempts to artificially inflate consumers’ credit scores and deliberately misrepresent consumers’ credit history to potential lenders.
Regulatory Compliance Support — Many lenders require their credit risk scores to consider authorized user accounts in the score calculation in order to comply with federal regulations, specifically Regulation B 202.6(b)(6) of the Equal Credit Opportunity Act. That regulation requires lenders to consider “accounts that the applicant and the applicant’s spouse are permitted to use or for which both are contractually liable” when evaluating an applicant’s creditworthiness.
In response to these market needs, Fair Isaac is modifying the design of FICO® 08 to include authorized user information in the calculation of the score in a way that helps protects lenders from potential abuse of authorized user accounts. It’s important to note that all previous versions of the FICO® scoring formula have included authorized user information in score calculations. FICO® 08 Score Fair Isaac Corporation (NYSE:FIC) is the preeminent provider of creative analytics that unlock value for people, businesses and industries. Corporate Headquarters: Offices Worldwide:901 Marquette Avenue, Suite 3200 Brazil, Canada, India, Japan, Minneapolis, MN 55402 Malaysia, Singapore, Spain, 1 800 999 2955from the US United Kingdom, United States 1 612 758 5200 from anywhere firstname.lastname@example.org email www.fairisaac.com Fair Isaac and “It’s just a smarter way to do business” are registered trademarks of Fair Isaac Corporation. Falcon is a trademark of Fair Isaac Corporation. Other product and company names herein may be trademarks or registered trademarks of their respective owners. © 2005 Fair Isaac Corporation. All rights reserved. July 2008
Few Changes for Consumers
Overall FICO® 08 scoring stays the same for consumers.
- FICO® 08 scores keep the same score range of 300-850® with higher scores indicating better risk
- The score is still based entirely on credit history from the consumer’s credit bureau report
- Following the same good credit habits over time will produce a good FICO® 08 score:
Pay your bills on time
Keep your credit card balances low
Take on new credit only when you really need it
Score Shifts — Improving a score’s predictiveness means that some consumers’ scores will change. However most people’s FICO® 08 scores will change little compared with their current FICO® scores. For people whose scores do change, roughly half will see their scores either stay the same or go up at least slightly.
Missed Payments — FICO® 08 scores also provide greater flexibility regarding the negative effect of missed payments on a credit report. For borrowers who are in arrears on an account, their FICO® 08 scores may drop less if the borrower also has a number of other credit accounts in good standing. However, FICO® 08 scores could drop farther if the consumers’ credit reports show multiple delinquent accounts.
Number of Delinquencies — FICO® 08 scores may penalize less a single serious delinquency that occurred recently on an otherwise unblemished credit history. On the other hand, the FICO® 08 score will likely drop farther if the credit report shows a pattern of multiple prior delinquencies.
High Credit Usage — FICO® 08 will be more sensitivity regarding high credit card usage on the credit report.
Fair Isaac is working with the credit reporting agencies to make FICO® 08 scores generally available to lenders as soon as possible.